The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [175]
Yet he did not relax his rules in search of ways to keep the money at work. Instead, he laid out two new restrictions that would make it even harder for him to invest. These personal preferences now became part of the official canon.
1. We will not go into businesses where technology which is way over my head is crucial to the investment decision. I know about as much about semiconductors or integrated circuits as I do of the mating habits of the chrzaszcz.
2. [W]e will not seek out activity in investment operations, even if offering splendid profit expectations, where major human problems appear to have a substantial chance of developing.
By “major human problems” he meant layoffs, plant closings—and union businesses that couldn’t take a strike. This also meant he would think once, twice, three times, before smoking any more cigar butts.
The cigar butts he owned were problem enough. Berkshire Hathaway was now “on life support.” Buffett had recently hired his Peat, Marwick auditor, Verne McKenzie, and sent him off to New Bedford to oversee the wretched textile mill. He had been regretting a mistake he had made at a recent Berkshire Hathaway board meeting. Feeling flush during what would turn out to be a brief moment of financial success—“we were selling out of rayon linings for a few months and making a lot of money”7—Buffett had let himself get talked into a ten-cent-per-share dividend. The firm’s lawyers had argued that Berkshire was doing so well that it might be accused of unjustifiably retaining earnings. Either while daydreaming or simply in a moment of weakness, Buffett went along with the distribution; a dime a share sounded measly; it somehow took him twenty-four hours to realize the fallacy of their argument. By then it was too late and his uncharacteristic agreeableness had showered on the partners and shareholders $101,733 that he knew he could have turned into millions someday.8 He would never make a mistake like that again.
Eight months later, Buffett offered the Berkshire shareholders a swap. Anyone who wanted an income-producing security could have a 7½ percent debenture in exchange for stock. A total of 32,000 shares were turned in. With this move Buffett washed out of the mix a group of shareholders who wanted income, ensuring that the rest were more likely to care about growth instead of dividends. “It was brilliant,” says Verne McKenzie.9 And, of course, with fewer shares outstanding, he was able to tighten his grip on Berkshire that much more—curiously, even as the magnitude of his original error in buying the place was clearer. Ken Chace stoically followed Buffett’s orders to shrink the business. Rather than precipitate a hateful backlash like that at Dempster, Buffett listened to Chace’s recommendations that the unions be treated well, and decided to tolerate losses to keep some remnant of the company operational and New Bedford content.
By 1967 Chace and McKenzie had managed to pull the hapless maker of men’s suit linings back to breakeven. But the term “inflation”—moribund since the Second World War—was again on everyone’s lips. The costs of wages and raw materials were rising like silt in a river, and both foreign and southern textile mills with cheaper labor were drying up Berkshire’s sales.
Buffett gave the news to his partners: “B-H is experiencing and faces real difficulties in the textile business. While I don’t presently foresee any loss in underlying values, I similarly see no prospect of a good return on the assets employed in the textile business. Therefore, this segment of our portfolio will be a substantial drag on our relative performance…if the Dow continues to advance.”10
He tried